Flip side of economic growth: Cos prefer more capital over labour, create less jobs

NEW DELHI: Companies are preferring to employ more capital instead of labour while producing goods, lending credence to the belief that India's growth in the post-liberalisation era has failed to create more jobs.

The country's worker-to-fixed-capital ratio in the registered manufacturing sector has declined from 10.9 in 1990-91 to 3.2 in 2009-10, an ET analysis shows. Growth in employment, too, has slowed from 2.61% in 1993-94 to 1.02% in 2009-10, according to five-yearly NSSO survey.

"When viewed in conjunction with slowing employment, it is certainly a problem. And the main reason is that the labour-intensive industries are not growing fast enough," said Pronab Sen, principal advisor, Planning Commission. "More research is required to understand why the traditional labour-intensive industries are also preferring capital." An increasing bias towards capital-intensive production, or a higher degree of mechanization, has also skewed India's export basket.

According to a recent study by C Veeramani, a professor at Indra Gandhi Institute Of Developmental Research, the share of capital-intensive products in India's export basket more than doubled from about 25% in 1993 to nearly 54% in 2010 while the share of unskilled labour-intensive products halved from 30% to 15%. If the worker-to-fixed-capital ratio is baised towards capital, it reflects greater preference for capital goods in the production process.

"(It's) a matter of concern because it is this (labour-intensive manufacturing) sector that holds the potential to absorb the large pools of surplus labour from India's agriculture sector," Veeramani said. A fall in labour intensity in manufacturing -- the extent of labour inputs used in per unit of output produced -- also raises concerns about India's ability to absorb its rapidly expanding workforce and reap the benefits of a favorable demography.

According to UN estimates, the size of India's labour force was around 99 crore in 2010 and is expected to increase to 111 crore by 2020."Since the labour supply is rising but demand is unable to keep up, it is not possible to reap the benefits of a large young population- instead it will increase the burden on the economy as there will be more mouths to feed," said Arup Mitra, labour economist at the Institute of Economic Growth.

The worker-to-real GDP ratio in the registered manufacturing sector has also declined from 52.2 in 1990-91 to 17.4 in 2009-10, implying that fewer workers are used to produce one unit of product. Simultaneously, there has been an increase in fixed-capital-stock-to-real GDP ratio from 4.9 to 5.5 during the same period. Although some of this fall can be explained by rise in labour productivity, corresponding evidence of slowing employment and rising usage of fixed capital suggest lower preference for workers vis-A -vis capital.

According to a recent report by the international labour organization (ILO), total employment increased only by 0.1% between 2004-05 and 2009-10 whereas labour productivity grew by over 34% during this period.

Experts believe the shift towards capital-intensive production can be explained by restrictive labour laws, which result in an increase in contract labour, poor availability of skilled labour and greater competition from better quality foreign goods.

"The ASI (annual survey of industries) data on workers employed is underestimated because it doesn't capture the huge rise in contract labour. Rigid labour laws have forced employers to seek out workers on contract," said Ajit Ranade, chief economist at Aditya Birla Group. In India, firms employing more than 100 workers require government permission for layoffs, retrenchments or closures, preventing companies from shuttering unprofitable ventures.

"In traditional sectors like textiles and leather there has been pressure from global competition to ensure the minimum level of quality, which has encouraged use of capital-intensive techniques. Also there is some evidence of skill shortage," said Rajiv Kumar, secretary general of the Federation of Indian Chambers of Commerce And Industry.

(Data on workers employed has been sourced from the Annual Survey of Industries while the figures of net fixed capital formation and GDP in registered manufacturing are taken from national account statistics at constant prices.)